It’s gonna be a long post. But will definitely worth reading. So, let’s get started.

What is bitcoin?

In simple words, bitcoin is a virtual currency made by people with no central authority.

Huh, what does it mean? To understand it better, let’s compare it first with the normal currency.

In India, we have a fiat money.

Fiat money is a currency without intrinsic value established as money by government regulation. It has an assigned value only because the government uses its power to enforce the value of a fiat currency. Source: Wikipedia

The Indian currency is printed in the name of RBI and people believe in this currency because of it and exchange in the name of the government.

On the other hand, bitcoin is not generated by any government or authority. People exchange bitcoin only because they believe this as a kind of money (no central authority to implement it). It has no physical value.

Therefore, we can define bitcoin as a new form of digital currency that does not require any bank, government agency or a third party to operate.

People inside the system carry out transactions among each other over a decentralized network.

Now, let us understand bitcoin in details.

Bitcoin is a purely peer-to-peer version of electronic cash that would allow online payments sent directly from one party to another without going through a main institutional institution.

It is the first and the most popular cryptocurrency. However, it’s not the only one as there are a number of other cryptocurrencies available in the world.

Bitcoin was invented in 2008 by Satoshi Nakomoto. However, no one knows who is Satoshi Nakomoto. It might be a dummy name used by the creators of the bitcoin.

Bitcoin is a decentralized currency, which means that no central bank or government is controlling it.

In India, we have a fiat system. This means RBI decides the number of notes to print. They have their own rules on how much notes can be printed and when to print next notes.

However, for bitcoin, there will only be 21 million coins (This restriction is imposed by the creators to limit the bitcoin that can be generated).

Hence, it can be considered similar in attribute to gold (which is also finite). As there is fixed number of bitcoins, hence it’s worth will be more over time.

Didn’t understood? Let me explain.

The current fiat system leads to inflation. The currency notes can be printed more in future. Hence, their number will keep on increasing an, therefore, the currency notes value will worth less in future.

On the other hand, bitcoins are limited in number. It cannot be created more once a fixed number of coins has been generated. Hence, this will lead to ‘deflation’ which means that the bitcoins will worth more in future.

How does bitcoin works?

To understand how does bitcoin works, you first need to understand what is cryptocurrency.

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Source: Wikipedia

The bitcoins are generated and stored in a form of mathematical code called cryptography. This is the private encoding of the data.

Similar to bank accounts, wallets are used to store bitcoins. Wallets have a unique address which is a personal crypto address that only the individual can access.

This unique address helps to confirm that the money has been sent/received to the right address. Further, the transactions can be checked but cannot be altered or tempered.

Now, if there is no central authority, how to confirm that the transaction happened between two people? What if one lied?

Can’t a person just lie that he didn’t receive the coins if there is no central authority to check and the transaction happened peer-to-peer?

Or he can just say that he sent the coin (although he didn’t in actual). If there is no central authority, how will one proof the transactions between people-to-people?

Well, all the transactions are recorded in ledgers which you (or anyone) can see.

When you perform a transaction, you send this information to a number of people. Although there is no single centralized authority, however, this group of people maintains the transactions record. The best point is that anyone can become one of these people who keeps the track of transactions.

In this way, no one can cheat. If one people changes the transaction record, then it won’t match with the remaining other’s record and the dissimilarity will be found. Hence, this makes bitcoin one of the most secure currency.

And this is also the core concept of the blockchain.

What is Blockchain? The blockchain is a decentralized peer-to-peer system.

In simple words, millions of computes agree to keep a global record of the history of all the transactions that have ever placed in the system. This is called ledger.

How are bitcoins generated? What is mining?

When you transfer bitcoins, everyone knows about the transactions and writes it in their ledger. Hence, it is impossible to cheat.

The people who use their computer to look after the ledgers and keep the system running are called miners. They solve complex problems to put together all the transactions.

But why will anyone use his computer, pay the electricity bill and solve complex mathematical problems to keep the records of all the transactions taking place in the world?

This is because miners are awarded BITCOINS for their efforts. Each time they solve a complex problem to keep track of transactions, they receive few bitcoins.

And this is how bitcoins are generated.

Moreover, these miners also receive a small reward/concession per transactions for keeping the record alongside newly generated bitcoin.

Therefore, mining helps these people to generate new coins.

This is way similar to mining of gold. Both are limited in number and both are mined so that the miner will get the benefit.

What are the advantages of bitcoin?

Here are few of the advantages of bitcoin:

There is no middleman involved in the transactions and hence the fees are lower.

Bitcoins are hard to track. Although the records are maintained by the miners, however, the transactions are recorded in the form of cryptography.

Bitcoins are global with no barrier to join: Anyone can buy/sell bitcoin. There’s no fee, no government permission required and no bank account required.

The transactions are fast and transferred directly from person to person without going through a bank or clearing house.

Few facts and data related to bitcoins:

Here are few important facts and data related to bitcoins that you should know:

There will be total of 21 million bitcoins only that can be generated. Currently, over 16.8 million bitcoins have been mined.

To limit the total number of coins being generated by the miners, the creators of the bitcoins made a rule that after every 210,000 blocks, the number of the bitcoins generated will be half of the last time.

In the starting, 50 bitcoins were rewarded to the miners every time they solved a blockchain problem.

Then it reduced to 25. Currently, 12.5 new bitcoins are created and awarded to the miner’s account after solving a blockchain puzzle.

By 2140, all the bitcoins will be mined.

The market capitalization of bitcoin has crossed over $300 USD (by December 2017), which is more than that of Visa, Wal-mart, Intel, Coca-cola etc.

There are over 14 million users of bitcoins worldwide.

Price chart of Bitcoin: Here is the price chart of bitcoin since inception:

Bitcoin can be divided into smaller parts. It is named after the creator and is called ‘Satoshi’ (1 Satoshi= 0.00000001 Bitcoin).

UPDATE: Bitcoin Price (June 2018) – $6108 USD

Is bitcoin legal in India?

Yes, bitcoin is legal in India.

Can you make ‘internet’ illegal? The internet is also decentralized which means it is not authorized/regulated by any central government/authority. And that’s why the government has no control over it. The same goes for bitcoin.

The government of a country can restrict it but cannot make it illegal.

Bitcoin is not regulated by any authority in India. This means that nor government or any authority makes rules, regulations or guidelines for resolving any disputes regarding bitcoins. You cannot approach the government if you have any mis-happenings while dealing with bitcoins.

Here are few other cryptocurrencies (besides bitcoin) that you should watch out:

ETHEREUM

RIPPLE

BITCOIN CASH

LITECOIN

DASH

ZCASH

Conclusion:

It’s logical to consider cryptocurrency as the currency of the future. Bitcoin is certainly one of the most popular cryptocurrency and has played a big role in creating space in the hearts of the people against the traditional currencies.

The transaction of bitcoins are definitely legal in India and you can buy/sell bitcoins using the mobile apps like Zebpay or Unocoin.

However, bitcoin is not regulated by the Indian government. Hence, invest at your own risk.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting